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What is a Mortgage Credit Certificate and Could I Benefit from it?

A Mortgage Credit Certificate (MCC) is a tax credit given by the IRS to low and moderate income homebuyers. Generally the program is only available to first time homebuyers. Terms differ by state. An MCC can be a great way to use your home to save money on your taxes, but there are some drawbacks as well as hidden costs, so use caution in deciding whether to use the program.

An MCC is not credited at the closing of the loan, but on the homeowner’s federal taxes in the future. The credit can be used for each future tax year in which the mortgage is held that the homeowner has a tax liability. The amount of the tax credit is equal to 20 percent of the mortgage interest paid for the tax year. The remaining 80 percent interest is still eligible to be used as a tax deduction. If the mortgage is ever refinanced, the MCC will be voided, even if the recipient still owns the home.

Related: What Happens to My Taxes After Buying a Home?

An MCC usually costs around $650 up front, and mortgage lenders may charge an additional $100 processing fee at their discretion.

Not Everyone Benefits

While an MCC sounds like a great way to save money over the long term, many people who apply for an MCC end up disappointed. The difficulty stems from the fact that the IRS imposes a strict income limit on qualification.

The IRS determines the maximum annual income for each county in the nation. These limits are close to, but not necessarily tied to, median income figures. Since the maximum income is the same for single or dual occupancy households, it is much easier for a single person to qualify for an MCC than for married couples or families. As part of the approval process, the IRS will review an applicant’s tax returns and count any income shown toward the maximum income for the program, even if the homebuyer is not using an income source for mortgage loan qualifying.

Even if approved for an MCC, many people who fall into the income requirements find that they do not have enough of a tax liability to get their money’s worth out of the program. This is especially true for families who receive a child tax credit.

A further drawback to the MCC looms if the certificate holder sells their home within the first nine years of ownership. A recapture tax may be due for some of the savings of the MCC. Thus even if able to maximize tax savings from the MCC, it might be negated down the road through the recapture tax.

Consult the Experts

Despite the drawbacks, an MCC can be a good way for many people to reap tax savings through their mortgage, especially if you plan to own the home for longer than nine years. If you are a first time homebuyer, talk to both your mortgage lender and your tax preparer about the program. If your income falls within your county’s limit, your lender and CPA can help you determine if there are any long-term savings to be had through the program.

If you do decide to apply for an MCC, it has to be done prior to closing on your new home. The lender needs to apply for the program through the IRS, then the IRS needs to approve it, which may take one to two weeks. Once approved, you have 90 days to close on your home purchase.

Update: Have more financial questions? SmartAsset can help. So many people reached out to us looking for tax and long-term financial planning help, we started our own matching service to help you find a financial advisor. The SmartAdvisor matching tool can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three registered investment advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

Photo Credit: Jason Ruedy

Gregory Erich Phillips Gregory Erich Phillips has more than a dozen years of experience in the mortgage industry. He is an active mortgage loan officer and an expert resource on topics including economics, home financing and real estate trends.
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